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Choosing the right tariff for your household isn’t always as simple as it seems.As diverse as the range of energy tariffs on the market may be, they broadly fall into two categories: Fixed rate or variable. When comparing energy plans, it is important to understand the pros and cons of variably energy tariffs.
Last updated: February 2021
What is a variable energy tariff?
A variable rate tariff is an energy plan where the unit rates for electricity or gas may rise and fall with the cost of wholesale energy. Variable energy tariffs are usually the supplier’s standard or default tariff, and broadly speaking these are the more expensive offerings. But that doesn’t mean that a variable energy tariff can’t be advantageous for your household.
Virtually all energy suppliers offer at least one variable rate tariff. Indeed, Bulb’s Vari-Fair tariff is the only tariff that it offers to customers. However, most use their variable rate tariffs as their standard or default tariff. This is the tariff that customers are on when they are on a “deemed contract”. This happened when move into a new home where the energy supplier was chosen by the previous occupant, or when your fixed rate plan expires.
Conventional wisdom dictates that a variable rate tariff is always more expensive than its fixed rate counterpart. And while this is usually the case, especially if you’re with one of the “Big 6” energy suppliers whose variable rates are either at or just below the Energy Price Cap, it isn’t always so.
Some energy suppliers (again, like Bulb) make no profit on the energy unit rates. Their profits come exclusively from their daily standing charges. As such, when the cost of wholesale energy drops, this can result in great savings if you’re on a variable energy tariff. It’s just a case of finding the right tariff.
Is now a good time to get a variable tariff?
There are a number of reasons why now might be a good time to get a variable energy tariff. At the time of writing, wholesale energy prices are low. This is due to several factors, including plummeting crude oil prices due to significantly reduced demand since most of the world has been in lockdown throughout the COVID-19 pandemic. Another significant factor is that our renewable capacity has never been higher, making it cheaper than ever to create renewable lower from wind, solar, hydro and biomass (burning sustainably sourced wooden pellets instead of coal, oil or gas).
To add further confirmation that wholesale energy costs are low, in October 2020 Ofgem reduced the Energy Price Cap to £1,042 for both fuels. This is the lowest the cap has been since it was first introduced in January of 2019.
Be wary, however, a rise in energy prices could be on the horizon. A combination of COVID-related debt and the possibility of a No-Deal Brexit could have implications for the cost of wholesale energy.
That said, the beauty of a variable energy tariff is that you can switch at any time. Variable tariffs do not have a fixed rate, nor do they incur any exit fees. So you can enjoy a level of freedom that you won’t get on a fixed rate plan.
How often do variable energy rates change?
It’s important to note that while wholesale prices may rise and fall, your variable rates won’t necessarily always do the same. Like any commodity, wholesale energy costs are in a near constant state of flux, and suppliers track these costs on a daily basis. Suppliers usually only change their variable energy rates when there is a sustained shift in energy prices.
Octopus Energy is currently piloting a tracker tariff that keeps customers informed of the cost of wholesale energy via their mobile app. This allows customers to track the volatility of wholesale energy prices on a day-by-day basis. So you’re perfectly positioned to switch to a fixed energy plan if the future seems uncertain and you want to insulate yourself from the possibility of rising energy costs.
When will it impact my bill?
If you’re on a variable energy tariff, your supplier will have to give you reasonable notice when your energy rates change. Most suppliers will give you 30 days’ notice. Most energy switches take around 17 days to complete. So you have time to switch to a new tariff with the same supplier (or a brand new supplier) before your prices go up.
More than ever, our team of experts remain on deck to help you make savings on your energy. We understand how deeply the lives of many are affected by these trying times and we want to support you the best we can. More on your energy supply during COVID-19 in our article.
Volatility of gas and electricity prices
Gas and electricity experience their share of market volatility. If you want to ensure that you’re always getting the best value for money on your variable rate tariff, it’s a good idea to check the volatility of wholesale gas and electricity prices. You can check this on Ofgem’s website. Slight month-by-month fluctuations are unlikely to affect your rates in any meaningful way.
However, if you notice that wholesale energy costs are trending upwards, this may be an indicator that prices are likely to change in the long-term and you should switch to a fixed rate tariff to insulate yourself from risk.
What are the benefits of variable rate energy tariffs?
Variable rate energy tariff are often painted as offering less value for money than their fixed rate equivalents. However, this isn’t necessarily the case, as there are dozens of variable rate energy plans to choose from. Some have a hefty markup incorporated into their unit rates (especially those that have no standing charges). Some have very little profit margin or none at all on their unit rates.
The right variable energy tariff can have some significant advantages including:
- Energy savings when the cost of wholesale energy drops
- The freedom to switch suppliers whenever you want with no exit fees
- Whenever your supplier increases your variable energy rates they have to provide you with fair notice (usually 30 days) so you have enough time to choose a better value energy plan from either the same supplier or a new one.
What are the disadvantages of a variable rate energy plan?
Of course, while a variable rate energy plan can have its advantages, it also has some caveats and potential disadvantages. You need to be aware of these in order to choose the best energy tariff for your home.
- Rates are generally more expensive than fixed rate tariffs
- Rates can go up quite sharply if the cost of wholesale energy rises
- Suppliers may not necessarily pass on the savings to you if wholesale energy prices rise
Best variable energy tariffs on the market
Since virtually every energy supplier (with a few exceptions like Utility Point and So Energy) has at least one variable energy tariff on the market, you have a wealth of great options to choose from. However, some of our favourites at the time of writing include:
- Bulb: Vari-Fair
- Green Energy: Maple- Paperless
- Octopus Energy: Flexible Octopus
All of these offer some of the best variable rates on the market, along with 100% green energy. However, there are so many variables when it comes to choosing the best variable energy tariff for your needs. Rates can vary, depending on where you live, and your usage and priorities should be considered when choosing an energy deal.
We can scour the market for you to find the best variable energy deals on the market, including 100% renewable tariffs. So you can enjoy cheaper energy with the freedom to switch whenever you like. What’s more, we’ll even manage your switch for you from end-to-end. So you can enjoy a cheaper, greener and more flexible energy plan 100% hassle-free.
Would you like to know more about energy tariffs? Great! Read more in these related articles:
Updated on 24 Feb, 2021